Today, we hold two things constant: death and taxes. Despite their ubiquity in countries around the world, income taxes are a relatively new phenomenon.
America, for example, only added income taxes when it needed to fight a war – the US Civil War starting in 1862. In the 1800s, the UK periodically implemented income tax to help fight wars, then abolished income tax when the war was over.
Where does income tax come from? Which country filed the first income tax? Is income tax a permanent part of modern civilization? Let’s find out today as we dive into the history of income taxes.
Income Tax in Ancient Civilizations
Income tax is found in most modern countries. Modern income tax systems were only developed within the last 200 years or so. However, the roots of income tax systems go back much further – all the way to ancient Roman and Egyptian civilizations.
In ancient Egypt, citizens were charged a type of tax based on their wealth and social status. This tax was thought to be small, although little record of this tax has survived to the present day.
Later, in the Roman Republic, the public was taxed based on their ownership of wealth and property. In most normal circumstances, the tax rate was 1%. However, in times of war, the Republic would raise taxes to as high as 3%.
Your “income tax” was assessed based on your ownership of personal wealth, including things like real estate, slaves, animals, personal items, and monetary instruments (i.e. cash). The more property you had, the higher your tax burden.
Around the same time, in 10 AD, Emperor Wang Mang of the Xin Dynasty issued an income tax at 10% of the profits from skilled labor and professionals. This was unprecedented and seen to be extremely harsh. 13 years later, in 23 AD, Wang Mang was overthrown, and his tax system was abolished.
So far, none of these taxes have specifically been income taxes. They’ve either been wealth or “profit” taxes.
One of the first recorded income taxes was introduced in England in 1188, when Henry II created the “Saladin tithe” in an effort to raise money for the Third Crusade. That tithe required each layperson in England and Wales to be taxed 10% of their personal income and “moveable” property.
The First Modern Income Tax Was Introduced to the UK in 1799
Throughout the medieval era, the Middle Ages, and the Renaissance, tax systems around the world adopted similar models to the ones listed above: citizens were sometimes taxed a small amount of their wealth and income. It was often called a tithe or used to finance a war.
The first modern income tax systems appeared in the UK. Most historians will tell you that the inception date of the modern income tax system is 1799, when Prime Minister William Pitt the Younger formally implemented the income tax after a budget meeting in December 1798.
This introductory income tax was designed to pay for the French Revolutionary War. The money would be used to purchase weapons and equipment.
This income tax was also graduated (also known as “progressive”), which means it changed according to your level of income. Low income earners were charged 2 old pence in the pound (1/120), while higher income earners were charged 10%.
Pitt’s famous income tax system was in place between 1799 and 1802. After the Peace of Amiens, the income tax was abolished by new Prime Minister Henry Addington.
A New Income Tax for a New War
Addington didn’t abolish the income tax for long: in 1803, Great Britain resumed hostilities with France, causing Addington to reintroduce the income tax.
This time, the income tax system stayed in place for 13 years, before being abolished in 1816, one year after Napoleon had been defeated at the Battle of Waterloo.
There were many vocal opponents of the income tax in the early 1800s in Great Britain. These people believed that the income tax should only be used to finance wars, and was not to be used in peacetime.
After the tax was abolished in 1816, these opponents wanted to destroy all records of the tax. Thus, tax records were publicly burned (although copies were kept in the basement of a nearby courthouse).
Income Tax Reintroduced (Again) in 1842
The controversy over income tax continued throughout the early half of the 19th century in Great Britain. In 1842, Sir Robert Peel introduced something called the Income Tax Act that would change income tax laws in the UK forever.
Peel, interestingly enough, was a Conservative who had opposed income tax in the past. However, in 1842, he was a Prime Minister of a country facing growing budget deficits. He needed a new source of funds. His new income tax was only imposed on individuals who earned more than £150 a year (which works out to about £13,000 a year in 2015).
Peel never intended his Income Tax Act to be permanent. He only wanted to solve the budget deficit. However, it has remained a crucial part of the British taxation system ever since.
The First Personal Income Tax in the United States
In 1861, the US federal government imposed its first personal income tax on its citizens. The government needed money to fight in the American Civil War.
At the time, the income tax was assessed at 3% of all incomes over $800 USD (which works out to about $21,105 in 2015). A separate wartime income tax was approved in 1862, modifying the original tax.
Income tax was repealed in 1872. In fact, the first peacetime income tax in America was only created in 1894 through the Wilson-Gorman Tariff, also known simply as the Revenue Act.
There were two key parts of the Revenue Act:
-First, it reduced the United States tariffs that were originally set in 1890
-Second, it imposed a 2% income tax
The income tax was assessed at 2% on income over $4,000 (equivalent to around $95,000 today). That meant most Americans (over 90%) would not pay any income tax.
The Revenue Act significantly lowered tariffs. Tariffs were dropped to zero on iron ore, coal, lumber, and wool. This was part of the Democratic platform’s promises prior to the election. However, it angered American producers, as imports became significantly cheaper.
According to the government, the income tax was designed to offset the lost revenue from the reduction in tariffs.
The Revenue Act was eventually modified by protectionists in the Senate, who added more than 600 amendments to the bill, nullified the reforms, and raised rates again.
The income tax was later declared unconstitutional by the US Supreme Court, who decided that the tax was no apportioned according to the population of each state. Thus, America needed a new taxation system in place, which is what happened with the 16th Amendment in 1913.
Woodrow Wilson Makes Income Tax a Permanent Part of America
In 1913, the Sixteenth Amendment to the US Constitution was ratified by Woodrow Wilson. This officially made income tax a permanent fixture in the US Tax system. If you ask historians when income tax was first instituted in the United States, they’ll typically say income tax was instituted with the 16th Amendment.
By 1918, internal revenue collections passed the billion dollar mark. By 1920, taxes on the American public were raising $5.4 billion per year.
In 1915, the tax rate was 7%. By 1916, it had more than doubled to 15%. By 1917, the War Revenue Act had raised the top tax bracket to 67% to help fund World War I.
In 1920, citizens were paying a 73% tax rate at the highest bracket. In 1922, that number had dropped to 56%, before dropping even further to 46% in 1924. It remained steady at 25% for most of the next 10 years, until rising to 60 to 80% in the years leading up to the Second World War.
After World War II, employment dramatically increased across the nation, causing tax collection to rise. By 1945, the IRS was collecting $43 billion in taxes per year.
Ronald Reagan’s Tax Cuts in the 1980s
America’s tax history remained steady throughout the 1950s, 60s, and 70s. In the 1980s, however, Reagan decided that America was paying too much tax. In 1981, Congress enacted the largest tax cut in US history, cutting approximately $750 billion from the budget over a six year period.
That $750 billion cut sounds dramatic. However, the losses were offset by two new tax acts in 1982 and 1984, which collectively tried to raise $265 billion.
In October 1986, Reagan signed the Tax Reform Act of 1986 into law, overhauling America’s tax system once again. This is considered the biggest change to the tax system since the adoption of income tax. The top tax rate on individual income was lowered from 50% to 28%, which was the lowest rate America’s wealthiest individuals had seen since 1916.
In an attempt to make the change revenue neutral, the act also called for a $120 billion increase in business taxation to make up the corresponding decrease in individual income taxation over a five year period.
Tax acts were signed into law every year between 1986 and 1990. By 1990, taxes on the wealthy were increasing once again.
President Clinton and the 1993 Revenue Reconciliation Act
President Clinton signed something called the Revenue Reconciliation Act in 1993. This Act was designed to reduce the federal deficit by approximately $500 billion, equal to the amount that would have accumulated between 1994 and 1998.
Clinton signed another tax act in 1997, cutting taxes by $152 billion and cutting the capital gains tax for individuals. There was also a $500 per child tax credit, and further tax incentives for education.
George Bush and the History of Income Tax
Bush made a number of substantive tax cuts during his presidency. He is best known for the Economic Growth and Tax Relief Reconciliation Act of 2001, which was estimated to save taxpayers $1.3 trillion over the next ten years.
Bush also created a new income tax bracket at the lowest level, which means Americans would pay only 10% for the first several thousand dollars earned. Meanwhile, the top four tax rates were cut by 3% to 4%.
Modern Income Tax in the United States
Starting in the early 2000s, millions of Americans began filing taxes electronically. In 2003, the IRS received 52.9 million electronic tax returns (40% of all tax returns). Today, that number is thought to be closer to 90%.
President Barack Obama has kept the highest tax rate steady at 35% for the highest bracket, the same rate Bush had initially implemented. In 2010, the IRS processed 230 million federal tax returns and supplemental documents for a total of $2.3 trillion in gross taxes. To put that number in perspective, they collected “just” $91 million in 1960.
Some Countries Have No Income Tax
Today, the vast majority of the world’s countries have income tax systems in place. However, not all countries have income tax. Many of the wealthy oil-producing nations charge no income tax on citizens, for example, as they generate enough income from oil taxes.
Countries with no income tax include:
-Saudi Arabia (social security payments and capital gains taxes only)
-Oman (social security payments only)
-United Arab Emirates
-Bahrain (7% social security tax, 1% expat tax, stamp duties on real estate, taxes on renting homes)
-Kuwait (social security payments only)
-Bermuda (Payroll tax, social security, property taxes, and customs duties)
-Cayman Islands (import duties up to 25%)
-Bahamas (import duties, national insurance, and property taxes)
-Monaco (only French citizens pay income tax in Monaco)
Many of the countries listed above have no capital gains tax, no social security payments, and no other taxes to speak of. Obviously, each of these countries has some unique advantages not found in other countries. The Gulf States have oil, for example, while countries like Bermuda and Monaco are deliberately setup to attract wealthy investors. They’re also all warm weather countries with few environmental challenges.
Income Taxes Around the World
On the other hand, some countries with strong educational systems and social programs have higher tax rates. Forbes recently published a list of countries where people pay the highest income tax on average.
This is the best way to look at income tax stats: some countries have a high tax rate at the highest bracket level, but few people pay those taxes. By looking at the average marginal tax rate, you get a better picture of what the average person pays in taxes.
-United Kingdom: 24.9%
-United States: 22.7%
-New Zealand: 16.4%
-South Korea: 13.0%
In general, mainland European and Scandinavian countries pay the highest taxes in the world, while countries like Canada, the United States, New Zealand, and Australia pay an average amount. Certain unique countries – like South Korea and Israel – pay comparatively little tax while remaining modern, first world countries.
Income Tax is (Probably) Here to Stay
Income tax is a relatively new phenomenon. Nations started experimenting with income taxes in the 1800s to finance various wars – including Great Britain’s wars against Napoleon and the United States Civil War.
By the early 1900s, income tax had become an increasingly necessary tool for governments. After two World Wars, most countries had implemented firm income tax systems and had come to depend on that revenue. Today, through all the changes in tax rates, income tax looks like it’s here to stay.